Alpha Hunter James Rickards on gold and the U.S. dollar

Currencies, central bankers and gold interactions

Rickards: It is important if, with me, you expect that the world will in time have to adopt some sort of gold standard. The phrase ‘the gold standard’ is misleading, there are many different ways in which one can structure a gold standard, or simply use gold as a reference of value, as suggested for example by Robert Zoellick in 2010. But given any resumption of a gold-based system, the most powerful countries will be the countries that have the gold. What is the best way to consider gold as a measure of relative economic power? One approach sometimes used is a measurement of the percentage of a nation’s reserves that is held in gold. The U.S. is in good shape, then, because it has 70% of its reserves in gold, whereas China has only 1% of its reserves in gold. But that, I submit, is a misleading measure. We don’t need a foreign currency, because we print dollars. So at least as long as the dollar retains its central measuring role in international transactions it isn’t surprising the U.S. doesn’t hold in reserve a lot of euros or pounds. We hold gold and we can produce dollars at will so we don’t really need foreign currency reserves. If you want to measure gold as a potential future backing for the economy, though, you need something more germane, and for this purpose one might consider the gold-to-GDP ratio. The ratio for the U.S. is now approximately 3%. For China, it’s at 0.7%. But that raises the issue of whether the Chinese are lying about their reserves. And clearly they are.

AAA: Where is Russia in terms of gold-to-GDP?

Rickards: Russia now, after an aggressive pattern of buying gold in recent years, has acquired 1/8th of the gold of the U.S. Russia has 1/8th the economy of the U.S., too, so in terms of the gold-to-GDP ratio they have attained parity. They’ve been very transparent about their buying, in contrast to the Chinese. Putin has also, not coincidentally, been very clear that he doesn’t want the U.S. dollar to continue to hold a central position in world markets.

AAA: Is this the real reason for the recent racketing up of Russia-U.S. tensions?

Rickards: There are lots of reasons for these tensions: Snowden, Syria, natural gas, and so forth. But gold and currency issues are surely part of that mix.

AAA: Finally, should investors care about the choice the White House appears ready to make between two candidates for the next Federal Reserve chair, now that it has become narrowed down (if reports are accurate) to either Janet Yellen or Lawrence Summers?

Rickards: Yes. There’s a difference. Yellen is a known quantity, a monetary dove who would be very slow to taper if at all, she might even speed the money creation. Summers is neither a hawk nor a dove. He’s a wild card, an unknown who might have the Fed engage in its money creation by buying assets other than Treasuries. He might buy stocks, for example, or munis.

AAA: So one possible scenario is that a Detroit bankruptcy causes the muni market to seize up, and the Federal Reserve decides to resolve this by becoming the muni-buyer of last resort?

Rickards: If you bring Summers in you run the risk he’ll think that’s a good idea.


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About the Author
Christopher Faille

Christopher Faille is a Jamesian pragmatist. William James has taught him, for example, that "you can say of a line that it runs east, or you can say that it runs west, and the line per se accepts both descriptions without rebelling at the inconsistency."

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